How the Bogle Model Beats the Yale Model

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markelp
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How the Bogle Model Beats the Yale Model

Post by markelp » Mon Feb 06, 2017 7:46 am

Comparison of a simple Vanguard 3-fund portfolio vs College Endowment funds that "try to invest in only the best money managers – utilizing both the public and private markets – to find the very best investment opportunities. They’re well-staffed and well-educated. They have access to the best and brightest minds in finance and are able to invest in funds that are reserved only for those with many millions or even billions of dollars and the right connections."

http://awealthofcommonsense.com/2017/02/how-the-bogle-model-beats-the-yale-model/

Spoiler: Vanguard has better returns in virtually all short and long term horizons and when compared to endowment size ($25M to over $1B)
Last edited by markelp on Mon Feb 06, 2017 7:57 am, edited 1 time in total.

Quark
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Re: How the Bogle Model Beats the Yale Model

Post by Quark » Mon Feb 06, 2017 7:52 am

I've long wondered why people who realize they can't pick winning investments believe they can pick winning money managers.

Bendee
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Re: How the Bogle Model Beats the Yale Model

Post by Bendee » Mon Feb 06, 2017 9:01 am

While I doubt the numbers would change too much, I would like to see this with a lower allocation to bonds - i.e. 50/30/20 US Eq/Int Eq/Bonds or thereabouts. Part of me thinks 40% is a little too bond heavy for this, but at the same time, college endowments are probably closer to 50-60 year olds than 30 year olds (me) when it comes to risk avoidance and such.

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Taylor Larimore
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The Three-Fund Portfolio

Post by Taylor Larimore » Mon Feb 06, 2017 9:15 am

markelp wrote:Comparison of a simple Vanguard 3-fund portfolio vs College Endowment funds that "try to invest in only the best money managers – utilizing both the public and private markets – to find the very best investment opportunities. They’re well-staffed and well-educated. They have access to the best and brightest minds in finance and are able to invest in funds that are reserved only for those with many millions or even billions of dollars and the right connections."

http://awealthofcommonsense.com/2017/02/how-the-bogle-model-beats-the-yale-model/

Spoiler: Vanguard has better returns in virtually all short and long term horizons and when compared to endowment size ($25M to over $1B)

Bogleheads:

This is a link to The Three-Fund Portfolio and its many advantages:

viewtopic.php?t=88005

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

likegarden
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Re: How the Bogle Model Beats the Yale Model

Post by likegarden » Mon Feb 06, 2017 11:17 am

The link shows that costs are much too high for these endowments - they did not get the message yet that costs are very important :

Costs are still prohibitive. The increased competition for money managers in the institutional space has yet to really drive down costs like we’ve seen in the retail world. As long as institutions continue to pay outsized fees, the majority of them are going to receive below average results.

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Re: How the Bogle Model Beats the Yale Model

Post by garlandwhizzer » Mon Feb 06, 2017 11:52 am

Great post! Demonstrates that a high cost complex "secret sauce" portfolio has reliably achieved only one thing relative to a simple inexpensive 3 fund portfolio over the past 10 years. The thing it has reliably achieved is lots of income and fees for those who create and market it. Take home message: the "secret sauce" is elusive. One wise choice for investors is to select a 3 fund portfolio rather than spending your time searching for the "secret sauce" that often seems to elude even the experts.

Garland Whizzer

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Re: How the Bogle Model Beats the Yale Model

Post by Valuethinker » Mon Feb 06, 2017 12:22 pm

markelp wrote:Comparison of a simple Vanguard 3-fund portfolio vs College Endowment funds that "try to invest in only the best money managers – utilizing both the public and private markets – to find the very best investment opportunities. They’re well-staffed and well-educated. They have access to the best and brightest minds in finance and are able to invest in funds that are reserved only for those with many millions or even billions of dollars and the right connections."

http://awealthofcommonsense.com/2017/02/how-the-bogle-model-beats-the-yale-model/

Spoiler: Vanguard has better returns in virtually all short and long term horizons and when compared to endowment size ($25M to over $1B)


Note though that they don't say .. beats Yale Endowment.

Because it doesn't. The Yale Endowment does in fact have extraordinary performance. William Bernstein has an essay on David Swensen and Warren Buffett. Pointing out that every field has its geniuses, and Swensen is the genius of the endowment world.

However for smaller investors with less skill in picking alternative asset managers the Bogle model probably is a better long term bet.

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Re: How the Bogle Model Beats the Yale Model

Post by Valuethinker » Mon Feb 06, 2017 12:23 pm

Quark wrote:I've long wondered why people who realize they can't pick winning investments believe they can pick winning money managers.


Because historically Yale has. They were early into alternative assets, and they picked good managers.

Duplicating Yale is, conversely, likely extremely difficult to do.

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Re: How the Bogle Model Beats the Yale Model

Post by pkcrafter » Mon Feb 06, 2017 12:24 pm

From Carlson's article:
This has nothing to do with active vs. passive investing. This is all about simple vs. complex, operationally efficient investment programs vs. operationally inefficient investment programs and high-probability portfolios vs. low-probability portfolios. Investing is hard enough as it is before introducing a complex, inefficient, low-probability investment style.


Simple + low cost is the 3-fund most efficient way to invest.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: How the Bogle Model Beats the Yale Model

Post by nedsaid » Mon Feb 06, 2017 12:41 pm

Valuethinker wrote:
markelp wrote:Comparison of a simple Vanguard 3-fund portfolio vs College Endowment funds that "try to invest in only the best money managers – utilizing both the public and private markets – to find the very best investment opportunities. They’re well-staffed and well-educated. They have access to the best and brightest minds in finance and are able to invest in funds that are reserved only for those with many millions or even billions of dollars and the right connections."

http://awealthofcommonsense.com/2017/02/how-the-bogle-model-beats-the-yale-model/

Spoiler: Vanguard has better returns in virtually all short and long term horizons and when compared to endowment size ($25M to over $1B)


Note though that they don't say .. beats Yale Endowment.

Because it doesn't. The Yale Endowment does in fact have extraordinary performance. William Bernstein has an essay on David Swensen and Warren Buffett. Pointing out that every field has its geniuses, and Swensen is the genius of the endowment world.

However for smaller investors with less skill in picking alternative asset managers the Bogle model probably is a better long term bet.


The Yale Endowment has a couple of things you and I don't have. First, scale on the order of billions of dollars to invest. Second, a virtually unlimited time horizon which is useful when you hold a lot of illiquid assets. I suspect Yale's outperformance is due to being the early bird getting the worm and a premium for holding valuable but illiquid assets. Swenson was early to the "alternative asset" party. He also profited from owning such things as private equity and directly owned real estate and timber. Yale has the scale that they could form their own real estate and timber management companies and probably do it at lower cost than a REIT.
A fool and his money are good for business.

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Re: How the Bogle Model Beats the Yale Model

Post by Quark » Mon Feb 06, 2017 12:53 pm

Valuethinker wrote:
Quark wrote:I've long wondered why people who realize they can't pick winning investments believe they can pick winning money managers.

Because historically Yale has. They were early into alternative assets, and they picked good managers.

Duplicating Yale is, conversely, likely extremely difficult to do.

Duplicating Yale may be easier if you have many billions to invest, a talented team with a long track record, access to investments unavailable to almost anyone else and effectively an infinite time horizon. Even if you have all that, duplicating Yale is likely extremely difficult to do. If you don't, it's purely a matter of luck, with the odds heavily against you.

I should be able to run the 100m in under 10 seconds. After all, Usain Bolt did in it in 9.58.

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Hawaiishrimp
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Re: How the Bogle Model Beats the Yale Model

Post by Hawaiishrimp » Mon Feb 06, 2017 2:31 pm

Once I knew my financial advisor lived in Encinitas, much closer to the ocean than I was, I said "Screw that, I am firing you."

By the way, I hired him less than 2 months in total. This industry need to be made obsolete.
I save and invest my money, so money can make money for me, so I don't have to make money eventually.

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Re: How the Bogle Model Beats the Yale Model

Post by jf89 » Mon Feb 06, 2017 2:44 pm

Hawaiishrimp wrote:Once I knew my financial advisor lived in Encinitas, much closer to the ocean than I was, I said "Screw that, I am firing you."

By the way, I hired him less than 2 months in total. This industry need to be made obsolete.


Just because someone lives in a nicer town than you doesn't mean they are wasting your money or should be made obsolete. You and I don't currently need a financial advisor, but many lack the time, interest, or confidence to do it for themselves. For them, a good financial advisor is a must. And if that advisor is good at their job, even at fiduciary costs, they can easily afford a home in whatever town you pick and should be allowed to without people yelling that their home is too nice therefore they are ripping you off.
"Save as much as you can, diversify diversify diversify, and you can't go wrong with tech stocks" | -First investing advice I recall from my parents in the 90's (two outta three ain't bad)

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patrick013
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Re: How the Bogle Model Beats the Yale Model

Post by patrick013 » Mon Feb 06, 2017 3:12 pm

I read an article last week where Harvard was busy replacing
it's investment advisor's. The article included a table of 9
of the biggest endowment funds and only 3 beat the 500 for
the time period selected. Those would most likely be invested
in higher risk investments like high yield bonds, preferred's,
hedge funds, private equity real estate, etc.. If you can guess
the estimated default or failure rate then the risks paid off
this time. Most spend simply millions for investment advisor
fees.
age in bonds, buy-and-hold, 10 year business cycle

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Hawaiishrimp
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Re: How the Bogle Model Beats the Yale Model

Post by Hawaiishrimp » Mon Feb 06, 2017 7:54 pm

jf89 wrote:
Hawaiishrimp wrote:Once I knew my financial advisor lived in Encinitas, much closer to the ocean than I was, I said "Screw that, I am firing you."

By the way, I hired him less than 2 months in total. This industry need to be made obsolete.


Just because someone lives in a nicer town than you doesn't mean they are wasting your money or should be made obsolete. You and I don't currently need a financial advisor, but many lack the time, interest, or confidence to do it for themselves. For them, a good financial advisor is a must. And if that advisor is good at their job, even at fiduciary costs, they can easily afford a home in whatever town you pick and should be allowed to without people yelling that their home is too nice therefore they are ripping you off.


No, I respectfully disagree.
I save and invest my money, so money can make money for me, so I don't have to make money eventually.

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Uncle Pennybags
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Re: How the Bogle Model Beats the Yale Model

Post by Uncle Pennybags » Mon Feb 06, 2017 8:00 pm

Those endowment returns are tax free too; if they had to pay their own way that pile of money would be shrinking even faster.

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Taylor Larimore
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Bogle Model contains Tax and Simplicity advantages

Post by Taylor Larimore » Mon Feb 06, 2017 8:08 pm

Uncle Pennybags wrote:Those endowment returns are tax free too; if they had to pay their own way that pile of money would be shrinking even faster.

Uncle Pennybags:

Thank you for reminding us of a very good point.

And let's not forget the many advantages of "simplicity" listed in my signature link below.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: How the Bogle Model Beats the Yale Model

Post by sschullo » Tue Feb 07, 2017 8:45 am

pkcrafter wrote:From Carlson's article:
This has nothing to do with active vs. passive investing. This is all about simple vs. complex, operationally efficient investment programs vs. operationally inefficient investment programs and high-probability portfolios vs. low-probability portfolios. Investing is hard enough as it is before introducing a complex, inefficient, low-probability investment style.


Simple + low cost is the 3-fund most efficient way to invest.

Paul


Paul,
You are right on.
I was chatting with a friend the other day about my blog. She asked a simple question. What is it you want to say? I said that investing process is incredibly simple that my Italian grandmother who was not literate could understand, or a middle school student. She was interested! She knows little to nothing about investing.

The active vs. passive is too complex to explain to my friend, who would have lost interest. I am hoping the debate starts to go into that direction of simple vs. complex. Constructing a simple portfolio is....simple. Taylor has been displaying the 3-fund portfolio for 15 years.

If people can understand simplicity, then we can focus on sticking with your simple portfolio, no matter what. Psychology of investing needs more attention, IMHO.
Public School K-12 Educators: "Ask NOT what your annuity sales person can do for you, ask what you can do to be a Do-It-Yourselfer (DIY)."

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Re: How the Bogle Model Beats the Yale Model

Post by juanovo » Tue Feb 07, 2017 9:05 am

I guess I find this a little sensational. Swensen himself the architect of the Yale Model wrote a whole book saying that individual investors could not and should not attempt to copy the Yale Model. He cites all the reasons in this thread: tax free status, best and brightest, access to investments, large dollars to invest etc.

I came to bogleheads through Swensen. If I had to do it all over again I probably would not slice and dice but rather go with a three fund. That being said I think the lazy portfolio he suggests, which for an individual investors follows his Yale Model's principles, but not methods or actual investments is very sound for an individual investor. Many roads to Dublin.

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Re: How the Bogle Model Beats the Yale Model

Post by afan » Tue Feb 07, 2017 1:00 pm

It is meaningless to compare returns without looking at risk. There was a study that showed risk adjusted returns of the big endowment investors to be basically determined by asset allocation, nothing to do with expert managers (I think it included Harvard during the period when it was doing well, as well as Yale). Even considering raw returns one has to be careful about the listed values of illiquid investments. The values are estimates of dubious reliability. Estimating the downside risk is really tricky when even retrospective data are unreliable because they were guesses as to what the sales price would have been, with no way to check.

Then for large investors one has to worry about the market impact of putting a large tract of land up for sale.

I would not view the returns reported by funds holding many of these investments as comparable to those composed of liquid assets. In other words, one can know the returns of VTI. One can have only a guess as to the return of raw land, real estate, hedge funds, private equity...
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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Why the Bogle model Beats the Yale Model

Post by Grt2bOutdoors » Thu Feb 09, 2017 5:43 pm

[Thread merged into here, see below. --admin LadyGeek]

Nice article on CBS Marketwatch by Ben Carlson. Taylor would approve.

http://www.marketwatch.com/story/a-less ... yptr=yahoo
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Re: Why the Bogle model Beats the Yale Model

Post by galeno » Thu Feb 09, 2017 5:57 pm

This is why we index. To constantly be in the top quartile or decile of "Yale-like" endowment portfolios by just "being there".
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 3.0%. TER = 0.4%. Port Yield = 2.0%. Term = 35 yr. FI Duration = 6.2 yr. Portfolio survival probability = 100%.

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Re: Why the Bogle model Beats the Yale Model

Post by willthrill81 » Thu Feb 09, 2017 6:26 pm

What I don't get about Swensen's is the 15% in TIPS. For a retiree with a finite lifespan, I can understand it, even though I don't think it's optimal then. But for an endowment with no finite lifespan, it baffles me. Perhaps someone smarter than me can explain it. Is it simply to reduce volatility?
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Re: Why the Bogle model Beats the Yale Model

Post by gkaplan » Thu Feb 09, 2017 6:46 pm

Gordon

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Re: Why the Bogle model Beats the Yale Model

Post by Boston Barry » Thu Feb 09, 2017 6:57 pm

willthrill81 wrote:What I don't get about Swensen's is the 15% in TIPS. For a retiree with a finite lifespan, I can understand it, even though I don't think it's optimal then. But for an endowment with no finite lifespan, it baffles me. Perhaps someone smarter than me can explain it. Is it simply to reduce volatility?


Be careful about confusing Swensen's TIPS recommendation to the individual investor, vs how he invests for Yale University.

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Re: Why the Bogle model Beats the Yale Model

Post by willthrill81 » Thu Feb 09, 2017 6:58 pm

Boston Barry wrote:
willthrill81 wrote:What I don't get about Swensen's is the 15% in TIPS. For a retiree with a finite lifespan, I can understand it, even though I don't think it's optimal then. But for an endowment with no finite lifespan, it baffles me. Perhaps someone smarter than me can explain it. Is it simply to reduce volatility?


Be careful about confusing Swensen's TIPS recommendation to the individual investor, vs how he invests for Yale University.


So he doesn't use TIPS for Yale?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Why the Bogle model Beats the Yale Model

Post by Boston Barry » Thu Feb 09, 2017 7:14 pm

Yale University's Portfolio in 2015 was only 8.5% fixed income in all, I do not know how much if any of that target was in TIPS. For a personal investor, Swensen recommends 15% TIPS.

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Re: How the Bogle Model Beats the Yale Model

Post by LadyGeek » Thu Feb 09, 2017 7:30 pm

FYI - I merged Grt2bOutdoors's thread into here.
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Re: How the Bogle Model Beats the Yale Model

Post by BBBob » Thu Feb 09, 2017 7:37 pm

Houghton College beats Harvard using Vanguard:
https://www.nytimes.com/2017/02/09/busi ... turns.html

"Houghton’s investment committee met this week, and is likely to move even further from active management, Mr. Morris (it's VP for Finance) said. “I went to the University of Chicago, where I sat in a lot of investment classes,” he told me. He learned how difficult it was for active managers to outperform market averages, “especially year after year,” he said, adding, “I’m a big believer in passive investment.”

"As for hedge funds and other high-cost alternatives, “the whole two-and-20 model” — in which investors typically pay 2 percent of assets under management and 20 percent of any gains — “is ridiculous,” Mr. Morris said. “The cost structure is outrageous. As they say on Wall Street, ‘Where are the customers’ yachts?’ I’m not going to play that game.”"

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